Comparative advantage vs. absolute advantage
A lawyer types faster than her assistant. So she should type her own reports, right? Most students say yes. Economics says no, and the reason is the difference between two words that sound alike: absolute advantage and comparative advantage.
Absolute advantage: who makes more
Nora and Tomas live in a small fishing village. Each works 8 hours a day and can bake bread or catch fish. In one hour, Nora bakes 4 loaves or catches 1 fish. Tomas bakes 1 loaf or catches 2 fish.
| In one hour | Nora | Tomas |
|---|---|---|
| Bread | 4 loaves | 1 loaf |
| Fish | 1 fish | 2 fish |
Nora has the absolute advantage in bread: she bakes four times as much. Tomas has the absolute advantage in fish: he catches twice as many. Absolute advantage only asks "who produces more?".
Comparative advantage: who gives up less
Every hour Nora spends fishing is an hour she is not baking. One fish costs her 4 loaves. For Tomas, an hour at sea gives 2 fish and loses 1 loaf, so one fish costs him only half a loaf. This "what you give up" is the opportunity cost.
| Opportunity cost | Nora | Tomas |
|---|---|---|
| 1 fish costs | 4 loaves | ½ loaf |
| 1 loaf costs | ¼ fish | 2 fish |
Tomas gives up less to catch a fish, so he has the comparative advantage in fish. Nora gives up less to bake a loaf (a quarter of a fish, against 2 fish for Tomas), so she has the comparative advantage in bread. On the graph, the opportunity cost is the slope of each person's line: Nora's is steep, Tomas's is flat.
Village: 20 loaves · 12 fish. Can you get more of both?
Why trade follows comparative advantage
Suppose each of them splits the day in half: 4 hours baking, 4 hours fishing. Nora makes 16 loaves and 4 fish; Tomas makes 4 loaves and 8 fish. The village has 20 loaves and 12 fish.
Now let each one do only the job where they give up less. Nora bakes all day: 32 loaves. Tomas fishes all day: 16 fish. Same hours, same people, and the village now has 32 loaves and 16 fish: more of both.
Then they trade. Tomas gives Nora 6 fish, and Nora gives Tomas 12 loaves (2 loaves per fish, a price between Nora's cost of 4 loaves and Tomas's cost of half a loaf, so both are happy to deal).
| Alone, half and half | Specialize and trade | |
|---|---|---|
| Nora | 16 loaves · 4 fish | 20 loaves · 6 fish |
| Tomas | 4 loaves · 8 fish | 12 loaves · 10 fish |
Both end up with more bread and more fish, and nobody worked an extra minute. The gain comes from the opportunity costs being different, not from who is faster.
When one person is better at everything
In the village the two advantages point the same way. The real test comes when they split. Ana is a lawyer: an hour of her legal work earns her firm $300, and she types a report in 1 hour. Ben, her assistant, cannot do legal work and needs 2 hours to type the same report, at $30 an hour.
Ana has the absolute advantage in typing: twice as fast. But look at what each hour costs the firm.
Typing the report costs the firm $60 when Ben does it and $300 when Ana does it. Ben gives up less, so he has the comparative advantage in typing even though he is slower. Ana's comparative advantage is in legal work. The faster worker is not always the cheaper one.
Countries follow the same rule. A country can be more productive than its neighbor at everything and still gain by making what costs it least and importing the rest.
One rule to remember
Nobody can have the comparative advantage in everything. If Ana gives up a lot to type, it is because she is very good at something else. When 1 fish costs Nora more loaves than Tomas, 1 loaf must cost her fewer fish than Tomas. So everyone has a comparative advantage somewhere, and that is what tells you who should do what.
The trap on tests
The classic error is to answer a comparative-advantage question with absolute numbers: "Ana should type because she is faster." A test gives you a table of outputs per hour and asks who should specialize in what. Do not compare the outputs across the row. For each person, divide: how much of the other good is lost for one unit of this one? The lower number wins. A second trap: saying that a country with no absolute advantage cannot trade. It can, and it gains, because its opportunity costs still differ from everyone else's.
Quick check
1. Nora bakes 4 loaves or catches 1 fish an hour; Tomas bakes 1 loaf or catches 2 fish. Who has the absolute advantage in bread, and who has the comparative advantage in fish?
Nora has the absolute advantage in bread (4 loaves an hour against 1). Tomas has the comparative advantage in fish: a fish costs him half a loaf, and it costs Nora 4 loaves.
2. A new neighbor, Lea, bakes 8 loaves or catches 4 fish an hour, more than both. Does she have a comparative advantage in both goods?
No. She has the absolute advantage in both, but one fish costs her 2 loaves (8 ÷ 4). That is more than Tomas's half a loaf, so Tomas still has the comparative advantage in fish. Lea's comparative advantage is in bread against Tomas.
3. Ana types a report in 1 hour, Ben in 2. Why should Ben type it?
Because of what each hour costs. Ana's hour costs the firm $300 of legal work; Ben's two hours cost $60. Ben has the lower opportunity cost, so he has the comparative advantage in typing, even though Ana is faster.